Commercial real estate survives slump better than housing
By Dan Caterinicchia
THE ASSOCIATED PRESS
Tuesday, Oct. 23 2007
WASHINGTON — The excesses that led to a bust in the housing boom haven’t spread
to the commercial real estate market, where the outlook is cautious but
Led by strong growth in the office and retail segments, commercial property
sales hit $401 billion through Oct. 18, outpacing last year’s $359 billion
total, according to Real Capital Analytics, a New York based real-estate
Construction spending on office buildings, shopping centers and other private,
nonresidential projects jumped 15.2 percent in August, the Commerce Department
said last month.
There are some signs of slowing growth, analysts say, but nothing compared with
the residential real estate market, where foreclosures and mortgage defaults
are still rising rapidly, mainly from subprime mortgages extended to risky
The commercial market has not been dragged down by the residential mortgage
mess because for the most part, buyers and sellers are more sophisticated, and
they have more financial flexibility and resources to ride out credit-market
turmoil, experts said.
“It’s a different animal than the nonresidential construction business with the
direct relationship between banks and business leaders, not banks and
homeowners,” said Bernard Baumohl, managing director of The Economic Outlook
Group in Princeton, N.J.
That doesn’t mean the market would be unaffected if economic growth stalls.
“As home prices continue to fall, people feel poor and spend less,” and that
puts pressure on the profits that fuel corporate spending, said William
Wheaton, research director at the Massachusetts Institute of Technology’s
Center for Real Estate.
Economic data due out soon are likely to show that September was one of the
slowest months in several years for all areas of commercial real estate — from
apartment buildings to retail properties, according to Real Capital Analytics.
If the broader economy stumbles, the commercial real estate market will be
vulnerable to “credit-risk contagion,” Wheaton said. Already, the credit crunch
that started in mortgages has spread to other markets, including the commercial
market, with some sellers asking for more capital upfront when mortgage-backed
assets are financing a transaction.
Projects in Midwestern cities dominated by individual investors have seen
prices plateau and capitalization rates rise compared with developments in New
York, Washington and San Francisco, where institutional and foreign investments
remain stable, said Dan Fasulo, managing director of Real Capital Analytics.
Risk premiums also are up, which means commercial real estate investors can’t
get sellers to finance as much debt as before. And there has been an
“above-normal flow” of lodging project cancellations and postponements, even
though the increase is “not excessive or alarming,” said Patrick Ford,
president of Lodging Econometrics, a Portsmouth, N.H.-based real estate
consulting firm. Speculative deals or developments with marginal profits are
“dead,” Wheaton said.
Yet only a handful of deals have been cut, analysts said, generally because the
buyer or developer had terms that “pushed the envelope’s edge” in a tight
Fundamentals in the commercial market remain strong with rising rents and
occupancy levels expected to continue, especially in metropolitan areas. And
while overbuilding in residential housing is worsening the magnitude of the
downturn, commercial markets are not in oversupply mode.
“There’s plenty of excess capital that wants into real estate, especially in
metro areas,” Fasulo said.
As the housing market struggles to regain its footing, the outlook for
commercial real estate is mostly positive, and investors are reaping the
A recent example: Host Hotels & Resorts Inc., the nation’s largest lodging real
estate investment trust, this month reported third-quarter results that beat
Wall Street estimates on improved occupancy and lodging rates.